Is Circuit City Headed for a Blowout?

(page 2 of 2)

Circuit City has been in dire straits ever since prices plummeted 40% to 50% two years ago (BusinessWeek, 4/23/07) for large flat-panel TVs, which were the chain's highest-selling item. It is being clobbered by newer competitors like warehouse club Costco (COST) and discounter Wal-Mart (WMT), both of which have been aggressively promoting electronic goods.

If anything, Wal-Mart has stepped up its offering of various electronic offerings. On June 3 the company announced that it had increased its assortment of high-definition TVs by 58% and had introduced new models from Sharp. It increased floor space for social gaming and video players from Samsung and Panasonic that offer pictures in the latest crystal-clear Blu-ray technology.

"As the popular high-definition flat-panel TVs and iPods become more commoditized, it's all about price now," says McCoy of TNS Retail Forward. "Wal-Mart has an advantage because of its size and superior bargaining power."

Suitors sought

Adding to Circuit City's woes is the economic downturn and the fact that consumers have clamped down on spending. Circuit City reported a loss of $165 million its fiscal first quarter ended May 31 and said sales at stores open for at least a year, a key measure of a retailer's health, were down 12.2% in the quarter.

In May, Schoonover hired investment bank Goldman Sachs (BusinessWeek, 5/9/08) to review strategic alternatives. Circuit City is under immense pressure from shareholders who have bought in anticipation of a sale. In particular, activist shareholder Mark Wattles, who controls a 6.5% stake in Circuit City, wants the company sold.

In an interview a week ago, right after the Circuit City annual meeting, Wattles said that at least a couple of private equity firms were in talks (BusinessWeek, 6/24/08) to acquire the company and that an announcement would come within four weeks. Wattles also had three of his nominees elected to Circuit City's board of directors; they seem to have the directive to secure the best price for the company if it is sold.

Wattles didn't return calls for comment on the latest twist in Circuit City's fortunes. However, a Chapter 11 filing would probably not be in his best interest. The average purchase price for his 6.5% stake, or 11 million shares, is $4.11. Already, the stock is trading at half of that. Even if a buyer emerges who wants to reorganize Circuit City under Chapter 11, "It is rare that shareholders receive even a dime during a bankruptcy," says Hynes.

Gogoi is a contributing writer for BusinessWeek.com.